Contactless in China

Without too much fanfare, Nokia and China Unionpay recently launched a near field communication (NFC) contactless payments trial in Shanghai allowing users to download a loyalty application over the air to their phones. It’s actually the 2nd trial of NFC in China. The first project was a ticketing and e-cash application loaded onto 100 phones in the coastal city of Xiamen which was also backed by Nokia.

What makes the new trial different is that the application can actually be downloaded over the mobile network to a secure chip in the phones. The users will then be able to use loyalty points for products and services at Shanghai’s No. 1 Yaohan Department Store. This is interesting functionality as companies could then actively push new services, tickets, e-cash to the phones themselves.

Even with compelling business models like the one above, mobile and contactless payments have been relatively slow to take hold in China. Although statistically nearly every man, woman and child in China has a phone, less than 3% of them actually use them for mobile payments. Slow adoption is actually both a supply and demand problem.

On the supply side, the mobile payment service providers have to navigate a complex and shifting ecosystem to implement any form of payments system. Invariably these need to involve the Chinese government and incumbent national provider China Mobile which further complicates matters. In addition, most need to be negotiated on a regional province by province basis making it difficult for smaller vendors and providers to do anything on a national basis.

On the demand side, the mainland Chinese have always subscribed to the ‘cash is king’ mentality. For them, the security, convenience of cash and old habits have slowed the adoption of mobile/NFC payments. Transportation cards however are an exception, especially in the major cities like Hong Kong where the Octopus card has become a key part of many people’s lives.

While not ubiquitous, implementation of contactless payment systems is on the rise on the mainland as well. In Shanghai, you can pay for buses, taxis and the metro using the ‘Shanghai Public Transportation Card’ or the ‘jiaotong’ card as it is more commonly known. Inevitably the use of the card will expand over time, but will likely never reach the same level of penetration that mobile payments potentially could.

An area that has driven mobile payments growth for many countries around the world is remittance. The issue is that China doesn’t have a very large international remittances market as a percentage of population when you compare it to other countries in South and South East Asia. This is largely down to the fact that a lot of the Chinese who can and are making large amounts of money are the ones that are in China.

What does exist is migrant worker remittance. Millions of Chinese leave their home provinces to come to work in the larger tier one cities like Shanghai and Beijing where the pay is better. Typically most of the money they make is then hand carried back to the worker’s home town over one of China’s national holidays. Mobile payments could potentially make life easier for migrant workers who can afford a mobile phone, but then there is the added issue of personal security. Some of the workers come to the larger cities illegally and using mobile payments may give the government a way to track who is actually working legally and illegally.

China’s banking infrastructure has gone through some incredible upgrades in the past few years in preparation for the 2008 Olympics and the 2010 World Expo in Shanghai. The uptake of mobile payments in a country with such a large mobile penetration and steadily improving infrastructure is inevitable - the question that remains is what will be the 'killer app' that will get it there?